U.S. Treasury and IRS Issue Final Regulations Under Section 752 Regarding Allocation of Liabilities Among Partners

On November 29, 2024, the Department of Treasury released final regulations relating to the allocation of recourse liabilities of a partnership among its partners under Section 752 of the Internal Revenue Code of 1986, as amended (the Code).¹ The regulations finalize proposed regulations issued on December 16, 2013, with certain modifications.

The regulations provide additional guidance or modify the application of Section 752 of the Code in three principal areas: (1) situations in which multiple partners have overlapping risk of loss; (2) the application of Section 752 to tiered partnership structures; and (3) the application of various related party rules in Section 752. The regulations also modify the regulations under Section 704 dealing with partner nonrecourse debt to be consistent with the regulations under Section 752 in tiered partnership structures. 

The final regulations are generally effective for liabilities incurred or assumed on or after December 2, 2024. If a liability incurred before December 2, 2024, is refinanced on or after that date, the new final regulations apply only to any increase in amount or extension of maturity resulting from the refinancing. Partnerships may, however, apply the new final regulations to liabilities incurred or assumed prior to December 2, 2024, provided they do so for all liabilities in a consistent manner.

I. Overlapping Risk of Loss

The final regulations retain the “proportionality rule” from the proposed regulations to determine how partners share a partnership liability when multiple partners bear the economic risk of loss for the same liability (taking into account all statutory and contractual obligations). Under this rule, the economic risk of loss borne by each partner is calculated by multiplying the total liability by a fraction, where the numerator is the partner’s individual economic risk of loss and the denominator is the total economic risk of loss borne by all partners. The IRS refused to allocate the liabilities based on the interests of the partners in partnership profits.

II. Tiered Partnership Structures

When a partner in an upper-tier partnership (UTP) also holds an interest in a lower-tier partnership (LTP) and bears the economic risk of loss for an LTP liability, the final regulations require the LTP to allocate that liability directly to the partner at the level of the LTP.

III. Related Party Rules

Normally, a partner is considered to bear the economic risk of loss if a related party to such partner bears such risk. The final regulations modify the application of the related party rules where a partner is allocated the liabilities of a UTP, the UTP owns interest in an LTP or corporate subsidiary, and the LTP or subsidiary is a lender to the UTP or has otherwise a payment obligation related to the UTP liability. In these situations the IRS felt that the UTP partners should not be treated as having the economic risk of loss solely because they indirectly (through the UTP) own the interest in the LTP or the stock in the subsidiary. Therefore, the final regulations do not treat the partners of UTP as bearing the economic risk of loss of such UTP liability by turning off certain stock and partnership ownership attribution rules.

The final regulations provide two further exceptions or special rules in attributing economic risk of loss among related persons. First, if a direct or indirect partner in a partnership directly bears the economic risk of loss for a partnership liability, other direct or indirect partners in the partnership are not treated as related to the first for purposes of determining their share of economic risk of loss. Second, if multiple partners are related to a third person that directly bears economic risk of loss for a partnership liability, each related partner is considered to bear the economic risk of loss in proportion to its interest in partnership profits.

IV. Partner Nonrecourse Debt Rules

The final regulations address an inconsistency between the rules for tiered partnerships under Section 752 and the rules for determining whether a nonrecourse liability is treated as partner nonrecourse debt under Section 704 due to a partner in a UTP having the economic risk of loss. Previously, regulations under Section 752 required liabilities of an LTP to be allocated to a UTP if the partners in the UTP bore the economic risk of loss for the liability, regardless of whether those partners were related to the UTP. In contrast, the nonrecourse debt regulations under Section 704 looked only to whether the UTP partner was related to the UTP and did not have a corresponding look-through rule for partnerships. The final regulations now provide that partner nonrecourse deductions attributable to an LTP’s liability must be allocated to the UTP if a partner in the UTP bears the economic risk of loss for the LTP’s liability. According to the Treasury Department, this is “implicitly” what the existing regulations already require, and the final regulations are intended only to “eliminate any uncertainty” and “clarify” the treatment.